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Here's Why You Should Hold on to Rexnord (RXN) Stock Now

We issued an updated research report on machinery company Rexnord Corporation (RXN - Free Report) on Sep 9. A diversified product portfolio, large customer base, potential benefits from strategic initiatives, meaningful divestments and synergistic benefits from acquisitions will prove advantageous for the company. However, headwinds related to international operations and industry competition might restrict its growth momentum in the near term.

It currently carries a Zacks Rank #3 (Hold). Over the last 60 days, the stock’s Zacks Consensus Estimate remained stable at 32 cents per share for second-quarter fiscal 2018 and at $1.27 for fiscal 2018.

Below we discuss why investors should now hold Rexnord’s stock.

Growth Drivers

Diversification Benefits: We believe Rexnord’s well-diversified product portfolio will help it grow in the quarters ahead. Its product line includes gears, couplings, industrial bearings, aerospace bearings, seals, drainage products, flush valves, faucet products, engineered valves and PEX piping. Globally recognized brands in the Process and Motion Control segment are Rexnord, Rex, Falk and Link-Belt while brands in the Water Management segment are Zurn, Wilkins, VAG, GA, Rodney Hunt and Fontaine. These products are used in various industries like mining, food & beverage, aerospace, non-residential construction and global water infrastructure.

Furthermore, international diversity has played a major role in Rexnord’s profitability growth over time. Notably, in first-quarter fiscal 2018, it derived nearly 30% of net revenues from its operations outside the United States.

Inorganic Growth and Other Strategic Initiatives: Acquiring meaningful businesses or disposing non-core assets have helped the company improve its business portfolio and work toward profitability enhancement. Notably, the company acquired Cambridge International Holdings Corporation while divested its non-strategic RHF product line for the best interests of its shareholders in fiscal 2017. In first-quarter fiscal 2018, the company’s acquisitions and divestments had a combined positive impact of 1% on sales growth.

Also, to drive operational efficiencies and lower cost burden, the company has been working on certain restructuring initiatives over time. Notably, it completed its supply-chain optimization and footprint-repositioning programs, resulting in a 20% reduction in manufacturing footprint, in first-quarter fiscal 2018. It is on track to reap benefits from the completed programs it in the quarters ahead.

Promising Fiscal 2018 Guidance & Long-Term Targets: For fiscal 2018, Rexnord anticipates benefiting from innovation of new products and strengthening consumer driven end markets. Core sales in the Process & Motion Control segment are predicted to be in low-single digits while that in the Water Management segment is predicted to be in mid-single digits. Consolidated core sales growth is predicted to be in low-single digit and adjusted earnings before interest, tax, depreciation and amortization (EBITDA) will be within $365-$385 million.

Over the long term, the company targets mid-single digit core growth, 30% incremental profit margin and free cash flow in excess of net income. Adjusted EBITDA margin is expected within 30-35% and 20-25% for the Process & Motion Control and Water Management segments, respectively.

In the last three months, Rexnord’s shares have yielded a return of 3.9%, outperforming roughly 3.1% decline of the industry.

Headwinds Marring Rexnord’s Growth Prospects

Diversification Woes: Rexnord’s geographical expansion has exposed it to risks arising from foreign currency movements and geopolitical issues. Notably, adverse foreign currency movements lowered revenues by 1% in first-quarter fiscal 2018. We believe that uncertainties in the economic growth of the countries served or weakness in industrial activities in the quarters ahead might severely impact the company’s businesses.

Relation to Global Uncertainties: Difficult macro conditions might influence activities in the construction, general industrial, mining, water infrastructure and aerospace industries, among others. Since Rexnord serves, directly or indirectly, customers in these end markets, any downturns in one or more of these markets could produce an adverse material impact on the company’s businesses. For fiscal 2018, the company anticipates water and waste water infrastructure to decline in the Middle East.

Other Headwinds: Rexnord is also exposed to risks arising from stiff competition from both larger and smaller companies that offer the same or similar products and services, or those producing different items suited to the same use.

Zacks Rank & Other Stocks to Consider

Rexnord currently has $2.6 billion market capitalization. We believe that the above-mentioned positives and negatives clearly justify the stock’s current Zacks Rank #3.

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Sun Hydraulics pulled off an average positive earnings surprise of 3.47% for the last four quarters. Also, its earnings estimates for 2017 and 2018 improved in the last 60 days.

Barnes Group’s earnings estimates for 2017 and 2018 were revised upward in the last 60 days. Also, the company’s average earnings surprise for the last four quarters was a positive 11.60%.

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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2017. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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